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Networks and Misallocation: Insurance, Migration, and the Rural-Urban Wage Gap

Abstract

We provide an explanation for large spatial wage disparities and low male migration in India that is based on the trade-o between consumption-smoothing, provided by
caste-based rural insurance networks, and the income-gains from migration. Our theory generates two key predictions, which we verify empirically: (i) relatively wealthy households within the caste who benet less from the redistributive (surplus-maximizing) network will be more likely to have migrant members, and (ii) households facing greater rural income-risk (who benet more from the insurance network) are less likely to have migrant members. Structural estimates of the model show that even small improvements in formal insurance decrease the spatial misallocation of labor by substantially increasing migration.

Paper by Kaivan Munshi and Mark Rosenzweigz

Ponente

Kaivan Munshi is a professor of the Faculty of Economics at the University of Cambridge. His research career has been devoted to the analysis of communities and their interaction with economic activity. His recent work has examined the effect of community networks on education, health, and mobility, which are key determinants of growth and development. Munshi’s research has been published in the American Economic Review, Journal of Political Economy, Quarterly Journal of Economics, and the Review of Economic Studies. He is currently co-editor of the Journal of Development Economics.